UK: A Golden Age For Employee Ownership?

Last Updated: 14 April 2016
Article by Graeme Nuttall

Graeme Nuttall OBE, a partner at Fieldfisher and author of the 'Nuttall Review of Employee Ownership', points out that this decade is shaping up as the decade in which employee ownership enters the mainstream of the UK economy—and the employee ownership trust (EOT) tax exemptions promote, for the first time, the trust model of employee ownership.

interviewed by Kate Beaumont for LexisNexis.

Are many companies implementing employee ownership trusts ("EOTs")?

Yes. The new tax exemptions for EOTs introduced in the Finance Act 2014 are working, as intended, to promote the employee ownership business model in all its forms and especially the trust model. Advisers now have to mention the possibility of a tax free sale to an EOT as a business succession solution. Companies of all sizes and from different sectors have moved to control by an EOT including Agilisys (IT and business service provider), Hayes Davidson (architectural visualisation studio), PB Design, Ten Insurance, Tibbalds Planning and Urban Design and Quintessa (a mathematical consultancy). Others have adopted the trust model but without using an EOT, such as EA Gibson Shipbrokers Ltd whose buy-out from Hunting Plc is notable because instead of using a traditional management buy-out, the sale was to all employees using an employee trust. Research shows this decade is shaping up as the decade in which employee ownership enters the mainstream of the UK economy.

In what circumstances are companies usually seeking to implement an EOT?

Employee ownership works at every stage in the business lifecycle. An EOT is just one of the ways of structuring employee ownership. It is designed to hold a majority shareholding permanently on behalf of all employees of a company (or group). The key drivers of all forms of employee ownership apply, namely, improved business outcomes and greater employee engagement. When an EOT is used there is usually also a very strong emphasis on succession planning and maintaining a company's independence. Often a management buy-out is unworkable because of the personal risks involved. An employee buy-out via an EOT can be the answer. One architect predicted recently that 'In a few years EOT ownership will become the main way UK architects firms are owned'.

Which tax reliefs are most often being relied upon in relation to an EOT?

There are two main new tax exemptions: a capital gains tax exemption available to individuals who sell a majority stake to an EOT and an income tax (but not NICs) exemption for certain bonus payments made to all employees of a company controlled by an EOT, up to £3,600 for each employee each tax year. It is important to realise that employee buy-outs are not tax driven. These tax exemptions send a strong message to company owners that the government believes in employee ownership. The CGT exemption works mainly to encourage sellers to consider employee ownership when they might otherwise overlook it, and paying no tax rather than 10% (with entrepreneur's relief) makes it easier to negotiate the sale consideration. The income tax exemption provides an alternative for those companies that wish to pay all-staff bonuses tax efficiently without the complexities of awarding free shares under a share incentive plan (SIP) and running an internal market.

Are there any particular practical problems that companies are encountering in relation to EOTs—either at implementation or ongoing operation?

Once up and running, employee trusts with permanent shareholdings rarely cause legal or tax issues. I am on record as saying it would help to have updated guidance on accounting for EOTs, which are very different in nature from most employee trusts accountants have previously encountered. Also banks need to become more familiar with EOTs. Employee buy-outs are predominantly vendor financed but larger buy-outs may require bank lending. There are other such ancillary issues with implementation but these are not really obstacles. 'The Nuttall Review of Employee Ownership' (BIS, July 2012) identified a lack of awareness of employee ownership as the main practical obstacle to making employee ownership mainstream and this is still true four years later. If a professional adviser does not know about employee ownership that is a major practical problem. I am pleased to see the Institute of Chartered Accountants in England and Wales is running a series of articles on employee ownership. This will help continue to raise awareness of employee ownership, as will this interview.

Are companies finding it straightforward to operate their employee share schemes alongside their EOT?

Many companies adopting the trust model of employee ownership aim for 100% trust ownership. But for those that have a hybrid model then, yes, they find it straightforward to operate an employee share plan alongside the trust. An EOT controlled company may typically operate a SIP to create a hybrid model of employee ownership which mixes trust and direct employee share ownership. Express statutory provisions permit an EOT to have a corporate trustee and the Finance Bill 2016 includes a provision that confirms an EOT's acquisition of a controlling interest is not a disqualifying event for enterprise management incentives (EMI) purposes. My preference is for the EOT's shareholding to be left alone and for another employee trust (which is not subject to the EOT all-employee requirements) to act as the warehouse for the employee share plan. There is nothing to prevent incentives for key individuals provided this is accepted by the EOT trustee as in the broader interests of all employees.

Is this a golden age for employee ownership?

We are in a remarkable era for promoting UK employee share ownership and employee ownership. Uniquely, we have an array of government supported measures that cover all forms of employee ownership. The EOT tax exemptions promote, for the first time, the trust model of employee ownership. Since 1978, tax advantaged share plans have encouraged direct employee share ownership. At last we have a clear message from the government that it also believes in the collective ownership of shares on behalf of all employees. The employee ownership business model helps achieve better business outcomes and happier staff and, especially through using an EOT, in a way that preserves the independence and successful longevity of a company.

This article was first published on Lexis®PSL Share Incentives analysis on 22 March 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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